To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Anhui Xinke New MaterialsLtd (SHSE:600255), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Anhui Xinke New MaterialsLtd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = CN¥41m ÷ (CN¥3.7b - CN¥1.7b) (Based on the trailing twelve months to March 2023).
So, Anhui Xinke New MaterialsLtd has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.7%.
Check out our latest analysis for Anhui Xinke New MaterialsLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Anhui Xinke New MaterialsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Anhui Xinke New MaterialsLtd Tell Us?
The trend of ROCE doesn't look fantastic because it's fallen from 6.2% five years ago and the business is utilizing 51% less capital, even after their capital raise (conducted prior to the latest reporting period).
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.
The Bottom Line On Anhui Xinke New MaterialsLtd's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 3.5% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One more thing to note, we've identified 1 warning sign with Anhui Xinke New MaterialsLtd and understanding this should be part of your investment process.
While Anhui Xinke New MaterialsLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.